We signed a contract with a company for $55,000. This company is now not meeting our needs as an institution and we would like to cancel with them. They are not going to refund any of the $55,000 but there is still a prepaid on the books for approximately $28,000. Is there any way to cancel with the company without recording the full $28,000 as an expense all at one time? We are a small institution and $28,000 all at once hurts our bottom line in a big way. We are also thinking about filing a lawsuit against this company if that helps in any way. Any ideas you may have would be greatly appreciated, but I have a feeling that there is going to be no way around moving the total pending prepaid to an expense GL.
CONTRACT/PREPAID
Answers
Interpreting your question, you had a contract with an institution to supply you books over a period of time. The total contract was for $55,000 and you have paid $28,000 out of the contract value.
now your vendor is not meeting your needs and thus you want to cancel the contract. and you are looking for an option for accounting of this prepayment of $28,000, which is practically nothing but a loss for you, if you can not recover.
Does your contract categorically specify all your needs that they are not meeting now? or are there any needs that were communicated verbally and not being met now. Unless there is a written agreement for all the needs, you can not sue the vendor and you will have to book the loss.
If you have everything in written and if you can prove that so many needs/conditions are not being met, you can sue the vendor and leave the balance of prepaid expense as prepaid expense with a documentation of the legal sue to recover the sue until the year ends. or, you can book the loss in the current period and whenever you can recover anything out of it, that is your gain.
There are many aspects that need to be studied for this matter before we jump to a conclusion.
I hope this will give you a direction to think about.
1
Good points. Engage your company attorney to figure out your chances of recovery.
Going forward, your CEO has learned a lesson. Never pay 100% up front, stay away from providers who want that kind of deal.
Perhaps we can more details about your company. Is it privately held? Do the shareholders depend on quarterly dividends? If you are a small privately held company, does it matter? How much per month of the 55K was being expensed? Is your company having a profitable year? These questions are important as taxes come into play.
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Accounting